The document discusses the circular flow model of income in a closed economy. It describes households and firms exchanging money for goods and services in product and resource markets, with total income and expenditure being equal. It then explains how leakages like saving, taxes and imports decrease the flow, while injections like investment, government spending and exports increase it. Specifically, it notes that saving reduces consumer spending while investment increases firm production. Additionally, taxes lower household income but government spending puts it back into the economy. Imports are foreign purchases while exports are foreign sales. The size of the circular flow depends on whether leakages or injections are greater.

1. The Circular Flow of Income Model
• Closed economy with no gov
• Adding leakages and injection
• Taxes and gov spending
• The size of the circular flow in relation to
the size of leakages and injections.

3. assumed that:
• Decision makers:
• they are linked through:
Households (consumers) Firms (businesses)
product markets resource market

4. = =
value of output
produced
expenditure to
purchase output
total income
producing the output

5. Leakages and injection
Leakages
saving
taxes
imports
Injections
investments
gov spending
exports

6. Saving and Investment
• saving is part of consumer income that is
not spent but is saved.
• investment is spending by firms for the
production of capital goods (factors of
production)

7. Taxes and Gov spending
• Households pay taxes: leakage because it
is income that is not spent to buy goods
and services.
• injection when the gov use the tax funds to
finance gov expenditure (edu, health,
defence)

8. Imports and Exports
• Imports are goods and services produced
in other countries and purchased by
domestic buyers
• Exports are goods and services produced
domestically and purchased by foreigners

9. • Real world, leakages and injection unlikely
to equal.
• Leakages > injections : circular flow
becomes smaller.
• Leakages < injections : circular flow
becomes larger.

10. • Real world, leakages and injection unlikely
to equal.
• Leakages > injections : circular flow
becomes smaller.
• Leakages < injections : circular flow
becomes larger.